Advanced Financial Accounting Ch6 Lecture Notes

Advanced Financial Accounting Ch6 Lecture Notes - 5-1...

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1 5-1 CHAPTER SIX Intercompany Transfers of Services & Noncurrent Assets ACCT400 Advanced Financial Accounting Fall Semester 2008 5-2 Overview Intercompany or intercorporate transfers: transactions between related companies Equivalent to transactions between operating divisions of a single company hence eliminated in consolidation Unrealized intercompany profit : unconfirmed profit from intercompany transfer (confirmed until resale to unrelated party) Accounting Research Bulletin No. 51 - Consolidated Financial Statements (ARB 51)
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2 5-3 Intercompany transfer of land Intercorporate sale of land at BV Buyer records: Land XX Cash XX Seller records: Cash XX Land XX Since there is no gain nor loss , both consolidated net income and total assets are stated correctly No eliminating entry required 5-4 Intercorporate sale of land other than BV Buyer records: Land XX Cash XX Seller records: Cash XX Land XX Gain on sale of land XX Gain is NOT realized from consolidated viewpoint (since not sold to outsider) and land has not increased in value Eliminating entry (gain): Gain on sale of land XX Land XX Eliminating entry (loss): Land XX Loss on sale of land XX
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3 5-5 Complications: Who is the seller??? Who recognizes unrealized profit??? Downstream sale P sells to S P recognizes unrealized profit hence eliminate from P’s income NO effect on S’s income NOT affect allocation of S’s income to P and NCI Upstream sale S sells to P S recognizes unrealized profit hence eliminate from S’s income Affect allocation of S’s income to P and NCI 5-6 Land - Downstream Textbook example: On December 31, 2000, P purchases 80% of S’s common stock for $240,000 On date of combination, S has $200,000 common stock outstanding and retained earnings of $100,000 On July 1, 2001, P sells land to S for $35,000 which P originally purchased on January 1, 2001 for $20,000 S continues to hold the land through 2001 and onwards Year 2001: $30,000 $50,000 S $60,000 $155,000 = $140,000 (OI) + $15,000 (Gain) P Dividends Separate Income
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5-7 P’s journal entry: Investment in S stock 240,000 Cash 240,000 Cash 35,000 Land 20,000 Gain on sale of land 15,000 Investment in S stock 40,000 Income from subsidiary 40,000 Cash 24,000 Investment in S stock 24,000 P’s investment balance = $240,000 + $40,000 - $24,000 = $256,000 S’s journal entry: Land 35,000 Cash 35,000 5-8 Consolidation workpaper at year 1 (Figure 6-3): Eliminating entry 1 (remove S’s income) Income from subsidiary 40,000 Dividends declared 24,000 Investment in S stock 16,000 Eliminating entry 2 (assign income to NCI) Income to noncontrolling interest 10,000 Dividends declared 6,000 Noncontrolling interest ($20,000 × 20%) 4,000 Eliminating entry 3 (intercorporate stockholdings) Common stock – S 200,000 Retained earnings 100,000 Investment in S stock 240,000 Noncontrolling interest ($300,000
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Advanced Financial Accounting Ch6 Lecture Notes - 5-1...

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